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Covetrus Inc. (NASDAQ:CVET)
Q1 2019 Earnings Call
May 15, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Covetrus First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press * then 0 on your touchtone telephone. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Nicholas Jansen, Vice President of Investor Relations. Sir, you may begin.

Nicholas Jansen -- Vice President of Investor Relations

Thank you, Joelle. Good morning. Thank you for joining us for Covetrus's Q1 2019 Earnings Call, our first as a publicly traded company. I am Nicholas Jansen, Vice President Investor Relations. Joining me on today's call are Benjamin Shaw, our President and Chief Executive Officer, and Christine Komola, our Executive Vice President and Chief Financial Officer. Ben and Christine will begin with prepared remarks and then we'll be happy to take your questions.

During this conference call, we anticipate making projections and forward-looking statements based on our current expectations All statements other than statements of historical fact made during this conference call are forward-looking, including statements regarding management's expectations for future financial business, operational performance, and operating expenditures. Forward-looking statements may be identified with words such as will, may, expect, plan, anticipate, upcoming, believe, estimate, or similar terminology and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control which could cause actual results to differ materially from those contemplated in these forward-looking statements. These risks and uncertainties include those under the heading "Risk Factors" in our most recent annual report on form 10-kK, quarterly report on Form 10-Q and other periodic reports filed with the Securities and Exchange Commission which are available on the Investors section of our website at www.covetrus.com and on the SEC's website at www.sec.gov.

Forward-looking statements speak only as the date hereof and except as required by law, we undertake no obligation to update or revise these forward-looking statements Also, as indicated in our registration statement and our 10-K filing, our financial statements for the prior year have been derived from the consolidated financial statements and accounting records of Henry Schein. These include allocations for direct costs and indirect costs which were attributed to the Animal Health business of Henry Schein. Some of these allocations, for example, were for certain support functions that were provided on a centralized basis within Henry Schein such as expenses for certain aspects of business technology, facilities, and other corporate functions. Henry Schein will continue to provide some of these services to Covetrus under the transitional service agreements or what you may hear us call TSAs.

As we noted in prior filings, the combined financial statements do not necessarily reflect what the results of operations would have been had we operated as a stand-alone public company. For all periods starting with the first quarter of 2019 and going forward, our adjusted results will be based on a direct cost associated with our stand-alone operations and not allocations. Those results will include costs related to the services we receive from Henry Schein under the TSAs I mentioned.

Additionally, our financial statements for the prior year and through February 7, 2019, do not include the consolidated financial statements of Vets First Choice. During this presentation, we will provide certain pro forma results for the first quarter of 2019 and the first quarter of 2018 to help investors understand the underlying trends in the business. However, the combined financial statements do not necessarily reflect what the results of operations would have been had we operated as a combined company in both periods as those results would depend on a number of factors including the chosen organizational structure, what functions were outsourced and performed by employees, and strategic decisions made in areas such as information technology and infrastructure.

We acknowledge this creates complexities in certain of our year over year comparisons, particularly during the first quarter when the closing of the transaction happened mid-way through February. You can find this morning's press release announcing our first quarter 2019 results and the slides referenced on this call on covetrus.com. We will continue to use our website to distribute important and time-critical company information. The slides and the press release also contain further information about the non-GAAP financial measures that we will discuss during this call. These non-GAAP financial measures exclude certain non-cash or non-recurring items such as costs directly associated with the spin-off and mergers and the ongoing integration process from our GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to consider the impact of these items as a supplement to financial performance measures determined in accordance with GAAP. Please refer to this morning's press release announcing our first quarter 2019 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

Before handing it off to Ben, we would first like to thank the investment community for their patience regarding the delayed released of our first quarter results. As you can imagine, the significant complexities tied to the transaction resulted in us needing a few more days to finalize the consolidation results. With that, I will now turn the call over to Ben to provide the highlights.

Benjamin Shaw -- President and Chief Executive Officer

Thank you, Nick. Let me start by recognizing the very significant effort, creativity, and support that has led to the creation of Covetrus via the combination of Henry Schein Animal Health and Vets First Choice and the subsequent listing on NASDAQ. I'll refer to slide 3 of the investor presentations that can be found on our website.

Covetrus is very well-positioned as a stand-alone company fully dedicated to the needs of veterinary medicine. We are off to a fast start toward executing against both our short-term priorities and our long-term strategies as build upon the platform that we expect will serve as the operating system for veterinary practice and deliver an integrated ecosystem of capabilities to enhance veterinary practice health and clinical outcomes on a global scale. Our results in the first quarter of 2019 and the first few weeks post-closing through March demonstrate a great attitude, great energy among our teams, good discipline in managing customer service levels, insightful planning for the transition out from the transition service agreements, and great early work to delivering an integrated set of commercial and operating capabilities.

We are grateful and really proud of the work by our teams and our friends at Henry Schein that led to a very smooth transition and carve out process. A very big thank you to our customers and our shareholders for a great response, your patience, and support for the creation of this new business. As outlined at our Capital Market's day in February earlier this year, the combination of these organizations creates a very compelling and highly differentiated platform for veterinarians to respond to rapidly evolving market dynamics and client expectations as well as to unlock significant new value by supporting the delivery of improved veterinary care while driving better financial outcomes.

The opportunity at Covetrus is to partner with veterinarians globally to identify and manage gaps in patient care to a single integrated online and in-office platform. By doing so, to expand the total addressable market and the growth prospects for the entire animal health ecosystem. By delivering on that mission, we can drive enhanced clinical care that will serve as the backbone for our long-term value proposition. We aspire to help professionalize many aspects of veterinary practice management to help our customers meet changing client expectations and new market pressure. Our platform brings together practice management software, insights and analytics, proactive prescription management and pharmacy services, client communications and appointment management, inventory and supply chain services, all together in a coordinated and integrated approach.

More than 100,000 veterinary practice customers rely on us for day-to-day practice management and supply chain solutions and we have a great obligation, expectation, an opportunity to deliver an integrated, seamless, end-to-end experience for veterinarians to improve workflow, create new efficiencies, drive new revenue streams, and enable significant new health and financial outcomes for customers across more than 100 countries.

Turning to the quarter, I'd like to start by highlighting a few important items on slide 4. We have focused significant efforts over the last few months on achieving day one launch of this independent, post-merger Covetrus. We delivered a very complex sequence of structural changes including the spin-off and carve out of Henry Schein Animal Health, the buyout of minority shareholders within Henry Schein Animal Health portfolio to eliminate what was otherwise a fundamental challenge toward alignment and integration, the merger with Vets First Choice, and the subsequent successful registration of Covetrus as a new public company.

Additionally, we began to establish new and necessary corporate infrastructure across multiple geographies to operate as a stand-alone company. Importantly, we are on track and we will be ready to exit our transition service agreements on the timeline previously agreed with Henry Schein. A mostly independent board of directors was created. We formed a new management team and launched a new brand, Covetrus, that speaks directly to our long-term commitment to the veterinary profession, putting "vet" at the center of everything we do. Significant planning and preparation over the last year ensured minimal disruption to customers, employees, and other stakeholders. I think that is a real tribute to the impressive operational expertise, great planning effort, a talented organization, and just tremendous teamwork across the globe to make that happen.

Upon closing the transaction, we've held global kickoff events with our teams to align on our vision, our growth priorities, and plans. We hosted a high-energy, North America event in early March to align our commercial organization, to cross-train teams on the combined platform, and to effectively team up for integrated account management in North America. Our commercial organization is energized. We've launched. We're aligned. We're focused as one team armed with a powerful platform that provides differentiating compelling capabilities for our customers.

Similarly, our European and Asia-Pacific teams hosted leadership meetings and we completed a Pan-European roadshow. Our teams are enthusiastic to coordinate capabilities across regions, to navigate out of the transition service agreements, to really expand our value proposition, and to initiate work to globalize more of our technology solutions. We've also engaged in productive conversations with manufacturers and strategic customer accounts across the globe. Feedback has just been very encouraging thus far.

As you know, the veterinary channel is under a lot of pressure. The Covetrus team is now able to provide the kind of differentiated capabilities veterinarians need at this critical moment in time for the profession so that veterinarians can better meet evolving client expectations in this rapidly changing market.

As we look forward, our team is focused on delivering long-term growth and value to our shareholders. We reiterate our commitment to generating incremental $100 million of run rate EBITDA by the end of year three and to simultaneously upgrade and modernize our global infrastructure to help align teams, standardize systems, improve communication workflow, keep pace with our growth expectations, and meet higher expectations for service and delivery against an increasingly complex quality obligation on a global basis.

Turning to slide five. A key value driver of our long-term success and the power of combining these two organizations will be the rapid adoption of Vets First Choice. The adoption of Vets First Choice as our proactive prescription management technology used by veterinary practice customers and the goal is to accelerate enrollment of practices onto the Vets First Choice solution first in the US and then around the globe to empower veterinary customers with new opportunities to drive compliance, strengthen client relationships, and better compete with retail competition.

As per our earnings announcement this morning, enrollments on our proactive prescription management technology increased by 18% year over year in the first quarter and we ended Q1 with more than 8,000 practices on the solution. Importantly, we experienced a surge of new high-quality leads in enrollments following our US national meeting in March where we introduced, trained, and launched the platform for the first time to our now more than 500 combined North America account managers. Our ability to drive this magnitude of year over year growth during the quarter with significant merger-related activities, I think, is a testament to the professionalism of our team, the attractiveness of our value proposition, and the differentiation of these capabilities.

Importantly, conversion from these new leads is exceeding our expectations. Adoption of prescription management is a journey and there is a predictable ramp-up period as customers create new active recommendations, prescribe medications, drive client reorder activity. This builds with a refill, renewal, and auto-ship services. We have a great, strong line of sight into the ramp of utilization and revenue acceleration for these accounts. We're still early in building momentum and organizing ourselves to maximize this opportunity. Our sales pipeline of qualified opportunities is strong with April growth meaningfully ahead of the pace seen in the first quarter.

In addition to this strong pipeline, we also have won multiple new corporate accounts that we'll enroll during the balance of the second quarter. Over the coming months, we will further train our inside sales teams and streamline enrollment processes. So, just please understand that we're really at the earliest stages of ramping our commercial efforts. The early success has validated our thesis for the combined organization to accelerate prescription management adoption and we're increasingly more confident that we can deliver on enrollment targets for the year. We now expect to enroll more than 3,000 new veterinary practice accounts in 2019. We will look forward to sharing details on this topic and those dynamics over the coming quarters.

As we drive enrollments forward, we are focused on generating increased, proactive prescription management activity. Practices leveraging our capabilities have access to views in gaps in patient care, which patients need what and when. Which enables the ability to drive active recommendations for refills and renewals of prescription medications or to have patients come back into the office or additional services such as diagnostics. Our technology enables veterinarians for the first time to directly attack gaps in care. This is allowing improved medical compliance and to expand their market opportunity. Encouragingly, our same-store sales, our comparable store partner sales, defined as those practices which began generating revenue in 2017 or earlier, delivered 22% revenue growth year over year in the first quarter of '19 when normalized for selling days, which exceeded our plan.

In Q1, Vets First Choice prescription management revenue increased 51% year over year when normalized for one less selling day in '19 versus 2018. Therapies under management, which is our key nonfinancial KPI for the Vets First Choice technology, increased by more than 50% in the first quarter of '19. New initiated therapies and successful refills and renewals on subsequent dispensing events creates a subscription like a model and a level of predictability into our future revenue outlook as the number of auto-ship medications represents a significant portion of our daily revenues. With the kind of deep and trusted customer relationships provided by our larger sales force as a result of this combination, we are excited about the potential for the strong performance to continue through 2019 and beyond.

We are also enthusiastic about the opportunities to deliver greater integration for our practice management software customers to improve workflow and for us to better leverage our national distribution network of approximately 20 distribution and pharmacy locations in North America as we seek to improve service and reduce costs over the course of 2019. Given the nature of the near and long-term opportunity, we are also aggressively adding innovation to the platform. We are excited about our recent soft launch of our new and differentiated appointment management service for Vets First Choice prescription management to support better medication persistence, which is really prescription renewal. The service is innovatively achieved a deep integration between our practice management software and our prescription management workflow. Our appointment management service enables a real-time, two-way read-write for customers seeking to drive greater in office services and client convenience.

Specifically, this service will help veterinary clients book appointments for in-office services in conjunction with prescription reissuance required for the second, third, and fourth year of treatment. This service will become more broadly available over the coming quarters. It's another important benefit and differentiator of our unique capabilities of the platform and we're just pleased that we're able to launch this important innovation just a few weeks following completion of the merge. We intend to continue to innovate to drive better client engagement on behalf of practices while streamlining workflow for veterinarians and their team of professionals.

We've also made significant progress with the adoption of our portfolio of practice management system offerings with health growth in our cloud solutions in the first quarter of 2019. We continue to expand on our market leadership position and expect to invest in new enhancements, new capabilities, and improved performance in 2019. Our budget has been updated to include additional investment in our PIM software development for this year, which will result in enhancements for our portfolio of offerings as well rapid development of next-generation enterprise cloud PIM solutions.

It is worth noting that revenue recognition and pricing models for cloud PIM, which represent a majority of our new wins, is different than a traditional license software model. The lifetime value of these types of relationships is higher over a five- or 10-year timeframe despite less revenue recognized upfront versus a client-server PIM sale. Our transition to the cloud is well under way and we are excited about the momentum these technology solutions are witnessing. Currently, our cloud install base represents 7.5% of our total PIMs customers which is an increase of more than 200 basis points year over year.

As we previously stated, we are working hard on driving enhancements to our to AVImark, ImproMed, and other PIMs offerings to make them even more user-friendly, to enhance performance, and to offer new integration capabilities and we're set to deliver these signature enhancements beginning in Q2. We expect these new enhancements will save our customers more than 1 hour per day per veterinarian, which provides a substantial workflow improvement. We have made incremental investments to enhance customer service levels, to deliver a better experience for partners, and to support a more rapid rate of PIMs upgrades over the coming years.

In total, our gross investment in PIMs is expected to increase by more than 35% in 2019, much of which is a one time step up as we look to drive further market share gains. We believe our leadership position in software has significant strategic implications as we seek to deliver a new prescription appointment and inventory management solutions into the market over the new few years. We acknowledge that this stepped-up level of PIM software investment in 2019 creates incremental pressure on a year over year comparisons of adjusted EBITDA growth. However, we believe these investments are important to our long-term growth algorithm and we view PIMs to be the strategic enabler and an important onramp for Vets First Choice prescription management.

Longer-term, we expect to continue to focus investment on our technology solutions to deliver next-generation functionality and workflow improvements to our veterinary practice customers globally, enhancing the overall value proposition. This includes investment in additional prescription and appointment management services as well as globalization of Vets First Choice which we remain committed to pushing forward by the end of 2020.

In total, Vets First Choice budget now includes an approximate 60% increase in total R&D dollar spend as we look to further enhance our already strong leadership position. All said, we remain focused on delivering double-digit EBITDA growth over the long-term as communicated at our Capital Markets day. These investments demonstrate our commitment to the profession as we seek to operate at very high standards of quality, privacy, security, and regulatory compliance as a trusted leader in integrated premise and online veterinary services including our practice management, prescription, and practice focused services and solutions. We're committed to protecting the privacy and security of our customer and their client information as we seek to deliver higher-quality, secure, and compliant solutions for the veterinary channel.

We take this commitment and our regulatory obligations very seriously. With our broad market geographic reach, we believe Covetrus can champion tougher, higher, stricter standards to provide the veterinary community confidence that we are operating at industry best practices and that their data is safe and secure.

Moving on to consolidated financial results. In Q1 we began this transformation with significant investments in our infrastructure, systems, and operating platforms while keeping pace with commercial priorities. We delivered consolidated, pro forma first quarter '19 organic growth of 3%. The pro forma results reflect a partial quarter for Vets First Choice for the period prior to the merger consummated on February 7th, excludes 4% foreign exchange headwind, while normalizing for revenue recognition adjustments for manufacture switches to agency styled sales. Our organic growth includes two headwinds that occurred prior to the merger: the previously announced loss of a large customer in North America and the loss of a manufacturer relationship in the fourth quarter of 2018 in APAC. These two events negatively impacted organic growth by more than 1% in the first quarter. In other words, the underlying organic revenue performance of Covetrus was able to overcome these two challenges and deliver growth consistent with the overall market during the quarter.

Importantly, consolidated organic growth was much stronger during the month of March, our first full month of integrated operations as a new company relative to the start of the year. We are encouraged by the topline trends we've seen with the start of Q2.

Looking specifically at our geographic performance on slide 6. North America revenue declined 1% on a pro forma basis versus the prior period. When normalized for manufacturer switches from direct to agency sales in North America, and a rebate reclassification in the prior year period, pro forma organic growth was 3% or inline with market growth. As expected, the previously announced loss of a large customer also impacted organic growth in the first quarter. Similar to other animal health company reports, weather played an important impact early in the quarter.

We are encouraged by our execution at the end of Q1 and we have been pleased with the improved topline performance in Q2 thus far in North America. We have several commercial efforts under way to maximize adoption of our integrated platform as well as to deliver on key infrastructure investments. We will expect to improve service, reduce cost, and offer new integrated capabilities.

I also want to highlight the recent appointment of Matt Leonard as EVP President North America and Global Supply Chain Officer. This appointment was a significant development for Covetrus as we look to leverage his expertise in technology, procurement, supply chain to drive an enhanced value proposition to our customers. Matt's background as CVS Health and in navigating complex supply chain and working with manufacturing partners is a tremendous asset to our global coordination efforts.

Our expectation is that accelerating growth of our platform combined with new customer winds and new manufacturing agreements such as the recent Mars Greenies announcement, along with easier year over year comparison, support a strong outlook for the second half of the year in North America. Long-term, our insights, multi-channel solutions, proprietary products and technology provided under one integrated platform focused on unlocking new value in the channel is a message that we believe resonates very well in the market. As well as more and more customers becoming familiar with the combined capabilities, brand, and the team at Covetrus.

Turning to Europe, our local teams had a strong quarter as seen on slide 7 with pro forma organic growth of 5%, which was an acceleration following the slowing trend witnessed in 2018. We saw success across all customer types ad have secured new corporate relationships defined as those customers who are actively acquiring or combining veterinary practices across local markets as we leverage our strategic position as the only Pan-European player in the market. We have also expanded relationships with several of our manufacturer partners to penetrate new geographies.

In Q1, we had a particularly strong performance in the Czech Republic, Spain, and Poland, with good performance in nearly all 18 EU markets in which we operate. We also continue to see momentum tied to our specialty businesses in Europe, particularly Kruuse and veterinary instrumentation which represent a core focus for us in the European market as we look to drive growth in our higher margin assets. Long-term, we're enthusiastic about the prospect for the commercialization of Vets First Choice and new software capabilities for the European market.

Lastly, as seen on slide 8, while our APAC and emerging markets business is experiencing a 3% decline pro forma organic growth in the quarter, it's important to remember that a major manufacturer went to direct sales in this market in early 4Q '18 which negatively impacted our business's topline growth by nearly 10% year over year. Excluding this headwind, our APAC and emerging markets business is growing faster than our overall company with particular success in cross-selling our practice management and supply chain solutions to key accounts in the ANZ marketplace.

We have also secured a new, exclusive manufacturer partnership in this market during March, which should help drive additional growth through the remainder of 2019. Our emerging markets business is also performing well, and we'll continue to look to build our out presence in these geographies long term to capitalize on favorable trends in the market. Again, the launch of Vets First Choice in APAC and emerging markets is a high priority and a really compelling opportunity long-term.

So, now I'll turn the call over to Christine to review 1Q '19 results in more detail and to provide additional color on financial guidance for 2019.

Christine Komola -- Executive Vice President and Chief Financial Officer

Thanks, Ben. Slide 9 summarizes our GAAP results while slide 10 describes the items considered in the adjusted financials. Slide 11, 12, and 17 provide a summary of the adjustments made to the GAAP results to arrive at our adjusted presentation for the first quarter of 2019 and the first quarter of 2018.

I will generally focus my comments on our adjusted measures to provide insight into the underlying trends of our business. So, please refer to today's earnings press release for a detailed description of the year over year changes in our first quarter GAAP results. Looking at the measures on slide 11, you will see total Covetrus non-GAAP, pro forma revenue declined 3% in Q1 of 2019. The effect of foreign exchange was a 4% headwind overall.

As Ben mentioned earlier, non-GAAP, pro forma organic revenue increased 3%, normalizing for FX and the revenue recognition changes in agency-based manufacturer relationships in North America. As a reminder, these revenue recognition changes do not have an impact on profitability.

Revenue growth this quarter was driven by strength in prescription management in North America and overall trends in Europe, offset by slightly lower North America growth including the impact from the previously announced customer loss and a headwind in APAC tied to the pharmaceutical manufacturer moving direct in October of 2018. Fully normalized for the latter two items that were known prior to the merger closing, underlying pro forma, organic growth would have been 4% in the quarter, a positive outcome in context of the amount of transformation achieved in bringing these two organizations together in February.

Since Ben spoke in great detail on overall and segment revenue trends in his prepared remarks, I will focus the rest of my comments on other income statement items as well as the balance sheet and cash flow statement. GAAP gross margin was 19.1% in the first quarter versus 18.6% in the prior year, aided by the inclusion of the higher gross margin Vets First Choice business. If Vets First Choice was included in both periods, gross margin as a percentage of revenue was 19.8% versus 19.7% in the prior year.

Growth in our higher-margin prescription management and specialty businesses offset incremental pressure in our North American business which faced a difficult year over year comparison in Q1. GAAP operating expenses were $189 million during the first quarter. This includes $5 million of Henry Schein corporate overhead allocation prior to the merger closing which had been excluded from our adjusted results as we were building out our own set of stand-alone corporate infrastructure during Q1. Additionally, stock-based compensation expenses were also meaningfully higher year over year reflective of transaction related dynamics. This is reflected in our non-GAAP results.

Underlying expenses were well-managed in the quarter but increased as a result of the growth in our prescription management business. One-time costs include those related to the spin-off and merger transaction including legal, financial advisor fees, and rebranding efforts, and other non-recurring items were $9 million during Q1, modestly below our expectations. We are now expecting one-time costs of $37 million in 2019 or $3 million below our initial view.

As Ben mentioned, in addition to these transaction-related one-time costs, which will diminish over a three-year transformation period, we are making additional investments in technology, services and integration activities which are reflected in our ongoing operational costs and are not a part of these adjustments to EBITDA.

Turning to slide 12, adjusted EBITDA was $52 million versus $54 million in the prior year, primarily due to the decline in North America including the impact of Vets First Choice from February 8th through March 31st, and a $2 million foreign exchange headwind year over year. Normalizing for full quarter ownership of Vets First Choice in both periods, pro forma adjusted EBITDA was $50 million versus $52 million in the prior year. Excluding the impact of foreign exchange, pro forma adjusted EBITDA would have relatively flat year over year off a difficult comparison from the prior year, particularly in North America.

In terms of geography, Europe and APAC modestly exceeded our internal expectations during the first quarter, whereas North America moderately underperformed due to the topline factors described previously and in the subsequent impact on gross margins. As revenue growth is expected to improve, as witnessed by the recent sales trends at the end of Q1 and starting in Q2, we see improved EBITDA off the Q1 level with a further step up in the second half of the year as our recent investments in innovations start to scale. The profitability of prescription management increases as revenue dropped at our established contribution margin and the value cap share we've discussed is delivered.

During the quarter, we've had approximately $10 million in net interest expense which is primarily interest on our $1.2 billion term loan issuance for two of the three months in Q1. Net of interest from our cash deposits. Our adjusted tax rate for the quarter was 25.9% and we forecast a 25% to 26% normalized tax rate excluding any one-time items for all of 2019, which is what we used in our adjusted net income calculations for both periods presented.

Looking at the bottom line, GAAP net loss of $13 million or a loss of $0.14 per diluted share and pro forma adjusted net income as seen on our non-GAAP reconciliation was a positive $13 million. Turning to cash flow, Covetrus used $39 million in cash flow from operations in the first quarter and generated negative $42 million in non-GAAP free cash flow when subtracting purchases of fixed assets of $3 million. Free cash flow performance was relatively consistent with the prior year outflow when non-GAAP free cash flow was negative $36 million and reflective of normal cash flow trends to start the year.

We ended the quarter with $73 million in cash and cash equivalence on the balance sheet, $1.2 billion in long-term debt, and an uncapped $300 million revolver facility. Our leverage ratio as defined by our credit agreements stood at approximately 4.4 times for the trailing 12 months ended October 31, 2019. Our credit agreement does permit adjustments for certain one-time items as well as our value capture items that we expect to realize over the next two months. As a reminder, we remain committed to deleveraging over the long-term and continue to expect at least $50 million in non-GAAP free cash flow during the first 12 months post-transaction close.

Regarding the company's planned transformation and innovation, we took critical steps in the first quarter to push forward with the value capture opportunities we've previously communicated and believe we are on track for the delivery of our year one target that is part of our three-year adjusted EBITDA goals. To reiterate, we expect to deliver $20 million in non-GAAP run rate adjusted EBITDA by the end of year one of our transaction close, and $100 million in non-GAAP, run rate adjusted EBITDA by the end of year three transaction close, with revenue value capture presenting approximately70% of the total.

As mentioned earlier in our remarks, Vets First Choice enrollment, for example, tracked above our value captured targets in the first quarter. We are no proceeding with supply chain and services initiatives to deliver anticipated cost benefits. Additionally, while more than 3,000 Vet First Choice prescription management enrollments forecasted for this year will only have a modest impact on 2019 revenues due to the timing of activation, we expect a lifetime value of these customers in three years to be quite high. We have an opportunity for significant longer-term value capture as we continue to uncover and identify new opportunities for value capture which we'll prioritize in the future.

Lastly, we expect and anticipate approximately $100 million in expenditures over the next three years of integration tied to standardizing core functions including HR, IT, legal, finance, operations, and supply chain. These integrations projects are intended to help support the future revenue growth platform acceleration and development, achieve operational efficiencies, improve service levels, and expand our regulatory compliance functions as we look to position the business for longer-term success. We expect the sales force enablement and the alignment of our global commercial team to service as foundational aspects of our go to market strategy entering 2020.

Turning to our financial performance for the full year in 2019 on slide 13, we project non-GAAP pro forma organic revenue growth of 3%-5% are in line with market growth and consistent with our prior commentary at our Capital Markets Day. As a reminder, non-GAAP, pro forma, organic growth assumes that both companies, the Animal Health business that was part of Henry Schein, and Vets First Choice were operating as one for all of 2018 and 2019. Additionally, as outlined during our Capital Market Day. Non-GAAP pro forma organic growth adjusts for foreign exchange, M&A activity and the revenue recognition changes in agency based on the manufacturer relationships in North America.

We expect these agency revenue recognition changes in 2019 will approximate $53 million with zero impact to non-GAAP pro forma adjusted EBITDA. Note that the previously disclosed loss of a major customer in North America and the impact from one manufacturer moving direct in APAC in October of 2018 is impacting our organic growth by an additional 2% in 2019.

From a global perspective, foreign exchange fluctuations could result in a 2.5% headwind to report non-GAAP pro forma revenue growth for 2019 should rates remain the same as of the end of Q1. We also project 2019 non-GAAP pro forma adjusted EBITDA to be within a range of $235 million to $250 million, which compares to the 2018 non-GAAP pro forma adjusted EBITDA baseline of $223 million as communicated in our press release this morning and our 8-K filed last week when normalizing for the carve-out adjustments in the prior year and our anticipated corporate overhead investments in 2019. Slide 18 provides the detail.

The range reflects 6%-12% pro forma adjusted EBITDA growth in 2019 and the high end is consistent with the double digit's growth comment made at our Capital Markets day in early February. The range incorporates funding of new investments in innovation to support our long-term growth initiatives including a year over year increase of $5 million in software and prescription management R&D investments, many of which are one-time step up in expenditures and recent foreign exchange fluctuations. With momentum across our businesses building including the strong adoption of Vets First Choice and our cloud-based PIM solutions during Q1, we believe it is prudent to accelerate certain investments in capital on our long-term opportunity.

As I mentioned earlier during the call and anticipate in our internal forecast for the full year, 2019 non-GAAP pro forma adjusted EBITDA will be weighted toward the second half of the year tied to increased profitability of Vets First Choice, an increased pace of revenue growth, the timing of certain new customer winds and initiatives, and expected value capture items. I would also point out the normal seasonality of our business as well as which should be additive to the Q1 non-GAAP adjusted EBITDA run rate. I would also expect and easing effect headwind initial returns from our technology investments that have recently gone live and easier year over year profitability comparisons, which collectively will add growth to the second half of 2019.

We are confident with the underlying building blocks we are using to establish our foundation and to continue to target double-digit EBITDA growth over the long-term, particularly as our go to market and value capture plans are realized, our one-time incremental investments in 2019 are completed, and as we drive further revenue acceleration.

Lastly, I want to provide a quick update on our planned first quarter of 2019 10-Q filing. While we are still pushing hard to finalize certain consolidated result matters by the end of the day today, we acknowledge that there is a possibility of a slight delay. As one can imagine, the complexities of the reverse Morris Trust transaction have resulted in a significant amount of technical related matters associated with the spin-off and merger. The issue at hand relates entirely to the initial accounting for the spin-off of the Henry Schein Animal Health business and is not expected to impact the income statement or cash flow. Our team has been working relentlessly to get these technical matters resolved and we will hope to have resolution very shortly that we can make a timely filing of our 10-Q.

Now, I will turn the call back over to Ben for some brief closing remarks.

Benjamin Shaw -- President and Chief Executive Officer

Thanks, Christine. There is slide 14 that summarizes key themes that we touched on earlier in these comments. All said, we are very pleased with how the integration year to date has progressed and how we are tracking toward strategic objectives. It is clear that we have a lot of work to do in what remains a competitive environment across all geographies. We will continue our value to customers and manufacturers. We look forward to enhancing our execution to maximize the acceleration of our strategic plan. I am confident that our team of more than 5,000 employees can deliver in the years ahead. I'd like to personally thank them for all their effort in delivering a successful Covetrus launch.

This concludes our prepared remarks. We'll turn it over to Nick to moderate Q&A discussion.

Nicholas Jansen -- Vice President of Investor Relations

Thanks, Ben. We want to take as many questions as possible so we ask that you limit them to two and then reenter the queue should you have additional ones.

So, Joelle, we are ready if you can provide instructions for the Q&A session and then we are ready to take the first question.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then the number 1 key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the # key. Again, that's * then 1 to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated.

Our first question comes from Erin Wright with Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Great. Thanks. So, your guidance here implies a considerable ramp in year over year profit growth over the next few quarters relative to the experience in the first quarter. What's driving this? Is it the synergy capture, the addition of new corporate accounts that you mentioned? How should we be thinking about that quarterly progression? Can you remind us what's embedded in your guidance in terms of the synergy capture and if you're on track with that $100 million in synergy capture over the next three years?

Nicholas Jansen -- Vice President of Investor Relations

Thanks, Erin. I'll let Ben start and then Christine you can answer the ramp on profitability.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. First, I just emphasize that there is seasonality in our business. Q1 is kind of typically a low point in the course of our year. We have significant value capture initiatives under way that will be, as we said at the Capital Markets Day, will be back half heavy as we continue to initiate work to capture those activities. So, again, value capture remains on track, but it is back second half heavy. And we have normal seasonality in our business. We're really confident in the ramp and we're encouraged by the early start in Q2. I'll let Christine add.

Christine Komola -- Executive Vice President and Chief Financial Officer

Sure. Thank you. So, we do actually have about $20 million as our run rate by the end of the year or value capture planned. Remember, we've also got FX headwinds that we've got embedded in here and the other point that I would add is that as we look at our revenue growth of the Vets First Choice platform growth, 51% is pretty significant. That will continue to be driving EBITDA operational dollar improvement.

Erin Wright -- Credit Suisse -- Analyst

Okay. And then I'll ask a question on the agency sales. This is a little bit of a two-part question here. The 300 basis points and headwind in North America from the agency sales shift, was this based on new changes in agencies relationships that were implemented January 1? I guess, usually you have a lot of visibility going into the year on sort of those dynamics. When will you lap the agency sale shift that's impacting your business in the most recent quarter? And then can you also speak to, I guess this is another question kind of on agency sales. Where are you at in terms of transferring agency sales to the VFC platform and how much of this dynamic is a component of your original $100 million in synergies that you've targeted over the next three years? Thanks.

Benjamin Shaw -- President and Chief Executive Officer

Yep. Thank you. Good questions. The answer is yes to the first questions, which is that these were changes that were implemented in Q1. We do not often have good visibility to those changes, and they can change throughout the course of the year depending on the individual brands or manufacturers. So, these were changes that took effect in Q1 and so we would expect to lap that if there's no further change in the subsequent 2020 period. So, I don't think that there's necessarily great visibility to how brands or manufacturers will make those changes and there's nothing that says they can't go back.

Your second question related to transform of platform, I think it's important to understand that with those agency dynamics, really our combined organization in North America, now is the opportunity to deliver proactive prescription management capabilities for three of the largest product categories that were previously not important to the business which is really around preventatives, food, and specialty and chronic medications.

And so, it's a big opportunity for our combined North America sales team to drive strategies that will dramatically improve compliance and engagement around those three major categories. And that presents upside compensation to our field sales organization and it provides a great value proposition to manufacturers and the ability to actually drive real compliance improvement and engagement. So, we expect that will be an important opportunity throughout this year and going forward. We believe we have really strong manufacturer support for those programs.

Erin Wright -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from John Kreger with William Blair. Your line is now open.

John Kreger -- William Blair -- Analyst

Hi. Thanks. Ben, it sounds like North America was a little softer than what you expected. Can you just clarify, is that kind of a market dynamic or maybe just a little bit of distraction within the organization that you guys dealt with all the merger-related issues? Thanks.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. I think North America has had a difficult Q1 in the sense that there were some tough weather dynamics. There were some changes around agency dynamics. We had a customer loss as we explained. But I think that overall our performance was in line with overall category growth. I do want to emphasize that we think the fundamentals, the macroeconomic dynamics of the channel are intact and that we're bullish about the overall performance of this category looking forward. But we do expect there to be variability quarter to quarter as we navigate some of those events. Our data showed that overall, we saw some soft total revenues and weakness in in-office traffic and patient visits. So, as we normalize our view for that, we feel like we're tracking pretty well to overall category dynamics in the small animal side of the market.

John Kreger -- William Blair -- Analyst

Great. Thanks. And then a follow up more relating to the legacy VFC business. What sort of underlying pricing trends are you seeing in the market given the shift of some volume to other e-commerce channels? Are you seeing that impact the pricing that your customers are choosing to make and how does that ripple through an impact you guys? Thanks.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. I guess I'd offer that the market remains very competitive. Pressure is on veterinarians and changes client expectations both bricks and mortar and online pharmacy dynamics remain very strong. We actually think that the long-term driver of enrollment and adoption of Vets First Choice platform is to ensure veterinarians increasingly have an urgent need to respond to some of these dynamics. We think that the Vets First Choice platform puts veterinarians in an advantageous position where they are able to be very successful meeting that expectation, driving great service and good value. And our manufacturer support and our ability to be an authorized direct supplier to manufacturers allows us access to manufacturer rebates and programs that are not available to diversionary channels. So, we just continue to believe that we are in a position to help veterinarians be very successful and to meet that changed service expectation. But we acknowledge the market is very competitive. We'll continue to get more competitive and we think it's one of the drivers for long-term adoption of our platforms.

John Kreger -- William Blair -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from David Larsen with SVB Leerink. Your line is now open.

David Larsen -- SVB Leerink -- Analyst

Hey, Ben. You mentioned $100 million of incremental EBITDA by end of year three through synergy capture. I guess, can you just sort of reaffirm that? If we use like $243 million as the midpoint for the guide and we say you're going to capture $20 million of that synergy in '19, that means you've got $80 million remaining. That puts you at $320 million by 2021. Is that math correct? In addition to the synergy, would you see some normal underlying growth in EBITDA for the business just sort of given your growth? Is that the right way to think about it? Any thoughts there would be helpful. Thanks.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. Well, I'll just reaffirm the way we framed this. Because we acknowledge that there are some moving parts here. But the first, we absolutely are on track to deliver $100 million of incremental EBITDA value capture as we go into the end of year three. Christine reiterated that we expect $20 million of that 2019. And that's run rate by the end of the year, to be clear about the definition of those terms. We also acknowledge that we're making significant one-time investments in modernizing infrastructure to ensure that we are staying competitive, that we are supporting growth expectation. And while much of that is one time, we acknowledge that some of those investments will come through as operating expense or ongoing cost. We think that we have created business cases to support each of those major strategic investments that we're making and most of them have a really compelling return on investment. Others are just more necessary and important relative to the creation of a stand-alone organization. So, I think the way you're thinking about this is correct. I would just ask you to acknowledge that it is a run rate EBITDA and second is that we are at the same time making more than $100 million of one time and significant infrastructure investments to modernize our global capabilities.

Nicholas Jansen -- Vice President of Investor Relations

David, just to be clear, the $100 million of integration activity is not all of that is OpEx. There is a significant component of capex. And when these plans are finalized and Christine can talk about it more, we'll relay all the details associated with any sort of impact to the operating EBITDA line.

David Larsen -- SVB Leerink -- Analyst

Okay. That's great. Can you maybe talk a little bit more about the lift in revenue that you've seen in like April and May? What in your mind is driving that? What steps have been taken to integrate the Henry Schein PIM system with the Vets First Choice platform? What has already been done and what sort of new product or integration is coming to market and what still needs to be done in the future? Thanks a lot.

Benjamin Shaw -- President and Chief Executive Officer

So, the first questions I would say, we really immediately following closing the transaction, we stood up and aligned a strong North American commercial organization. And we have similarly are in the process of achieving the same kind of alignment in Europe. This has really allowed us to have on face to the customer, where we have strong account management organizations who now can pull on integrated aligned teams of specialists who have expertise in prescription management or have expertise in process management software. So, we believe that one face to the customer and that integrated approach is really critical to our go to the market and going to continue to be an important driver not only for platform adoption but just overall share gain in the market. So, I guess I would also add that our sales representatives who continue to be 100% commission based. There're no territory changes. There's a very smooth transition for them. But they now get credit for both in-office and online revenues and are able to participate in a much bigger scope of product categories which is a great boost to their overall compensation opportunity.

I think your question is what we should look for in terms of new opportunities as we integrate these capabilities from a technology and software perspective. Did I understand the question correctly?

David Larsen -- SVB Leerink -- Analyst

Yeah. Just the integration of PIMs and Vets First Choice. And the ability to aggressively close gaps in care and increase volume into the clinics.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. So, I guess I would offer a couple of things. I think there are some really fantastic opportunities for native integration of some of these applications to be moved toward a single platform that supports practice management workflow, insights analytics, proactive prescription management, proactive inventory management, and appointment management. So, I acknowledge that in the quarter we launched our first appointment management service. I think this is a terrific example.

This is a very innovative capability in the sense that it's a real-time read-write capability and it's highly integrated into our prescription management workflow. And this is important because one of the major hurdles to driving prescription reissuance at the end of a treatment period is that we need to see that patient in the office for additional diagnostics or services. So, there is a natural rhythm between proactive prescription and therapeutic management and in office diagnostic. At the end of a year of heart worm preventative, I need to see you for heartworm test. At the end of the course of Levothyroxine, I need to see you for a T4 test. So, the ability to link those prescription management into in-office diagnostic service events is really important. That appointment management is having a direct impact on increasing prescription reissuance and timely renewal. So, I would put that in the category of persistence marketing opportunities. I think that just a particularly good example.

We acknowledge that we are delivering new signature enhancements in our legacy client-server systems. Some of this is around user experience, it's improving workflow. I mentioned that we expect these enhancements will save veterinarians an hour per day per veterinarian. So, a very big improvement but some of those signature enhancements directly relate to the integration of inventory management and the stronger, better, deeper, integration with prescription management. So, it's pretty fun and really interesting to now be able to create a workflow that has previously just never been possible.

David Larsen -- SVB Leerink -- Analyst

Great. Thanks very much.

Operator

Thank you. Our next question comes from Andrew Cooper with Raymond James. Your line is now open.

Andrew Cooper -- Raymond James -- Analyst

Thanks, guys. I appreciate you squeezing me in. I know it's bumping up on 10:00, but just a couple for me. I guess first, Ben, you reference I think in one of your answers that some of your data showed weakness in in-office traffic and some of the visit metrics. Can you talk about that relative from 4Q to 1Q after sort of some of your peers in the animal health space in general definitely saw a slow down in 4Q but back of an uptick in 1Q? Any color on that would be helpful.

Benjamin Shaw -- President and Chief Executive Officer

We saw that the transition from the fourth quarter to the first quarter we saw continued headwinds in the office around patient visits and around overall revenues for the practice. So, we see that is can continue in some markets. We actually saw that there was a pretty strong decline from the fourth quarter to the first quarter. So, I think that, yes, those trends had continued and we're really speaking to the companion animal side of the market which is the lion share of our North American business. So, yes, we did see that there were continued headwinds from the fourth quarter to the first quarter. Having said that, we also acknowledged in our remarks that March was a very strong month and so we're really optimistic as we head into Q2. We're seeing really strong momentum in the overall market. So, we bucked that trend that we saw heading into January and coming out of that into March.

Andrew Cooper -- Raymond James -- Analyst

Okay. That's helpful. And then, thinking about the 3,000 clinics add a number, I think that's probably a little bit more than we had thought at least in terms of before, probably closer when you layer in the benefit of looping the two sales forces together. How do you think about that kind of forward from there in terms of you exit the year at that point north of 10,000, a big chunk of the market, most of the low hanging fruit you would think you've gone after first, so how do we think about that longer-term domestically? At what point do you think you'll start talking to us a little bit more about some of the detail that you roll that platform internationally?

Benjamin Shaw -- President and Chief Executive Officer

Right. Well, I think we feel really good about providing that updated guidance following our North America launch and the integration of our sales team. What we described is a really robust pipeline in April. That was much greater year over year growth than what we experienced in the first quarter. So, we feel really good about that. We feel really good about the outlook. Frankly, the noise from online retailers wanting to disintermediate vet client relationships and steal away food and pharmacy business away from veterinarians is probably a rallying cry in the channel for veterinarians wanting to step up and respond to those pressures. We expect that all veterinarians in the United States, that all types of practitioners, whether ambulatory, equine, or corporate groups, or one doctor practices really would benefit from the setup and enrollment and engagement with Vets First Choice to help them respond to those overall market dynamics. We're very bullish long-term that we'll continue to see high engagement adoption from veterinarians with this capability set.

We also acknowledge that as we head into 2020, we remain committed to pursuing opportunities internationally. We just believe that key markets in APAC and emerging markets as well in Europe are very attractive for the Vets Frist Choice prescription management opportunity. We think it's going to be a really important part of our long-term growth strategy. In some ways, those markets may be more attractive than even the US market.

Andrew Cooper -- Raymond James -- Analyst

Great. I'll stick to two and bow offline.

Operator

Thank you. And our next question comes from Kevin Kedra with G. Research. Your line is now open.

Kevin Kedra -- G. Research -- Analyst

Hey. Thanks for taking the question. First, I just want to get clarification on the Vets First Choice sales set up around 51%. So, by my math, that would be about $67 million or so in the quarter. I just wanted to make sure I was doing the math right there. Secondly, you gave us a metric on the same stores growth around 22%, I think you said. How should we be thinking about that metric as we go through the balance of the year? Thanks.

Nicholas Jansen -- Vice President of Investor Relations

So, Kevin, to understand your question, the 51% that we quoted was Vets First Choice prescription management revenue. That is the platform related revenue as you see in the presentation. As you know, we do have a specialty business as well that we acquired in 2017 that we're actively looking to convert to the platform over time. On the same store number, Ben, I can pass it to you with regards to the kind of what you think about just the journey that these platform customers are on and the same store sustainability of that growth.

Benjamin Shaw -- President and Chief Executive Officer

I appreciate the term journey. As we onboard practices, our platform creates opportunities for veterinary healthcare team members for the first time to really clearly see where they have gaps in patient care and including patients who have been in today and walked out without purchasing medications who were due to refill. So, our ability to help create active recommendation and follow up to patients who have lapsed or become untreated on medication is really important. And that happens with subsequent refill and auto ship and renewal. It's a really predictable journey and ramp over time. So, a new practice is a very well understood, expected ramp about what we expect and how that builds over time. And that has been very consistent for us. I mentioned in my notes that we were really pleased with the first quarter same-store sale comp data. For those customers who have been on the platform on 2017 or prior experienced 22% same-store sales growth which is just to reflect that some of our oldest and most mature cohorts are still experiencing rapid year over year growth. We think that's really important toward setting expectations long-term about the nature of the total available market as we mature those cohort groups.

Did I answer your question?

Kevin Kedra -- G. Research -- Analyst

Yeah. Thank you.

Operator

Thank you. As a reminder, ladies and gentlemen, that's * then 1 to ask a question.

Our next question comes from Erin Wright with Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Great. Thanks. A couple of follow-ups here. You mentioned just in the last question the 22% in same-store cohort revenue growth. Can you provide some historical context there how that has been trending particularly on a sequential basis? And then heading into next year, separate question here, how should we be thinking about a potentially evolving parasiticide market? How much of your total revenue today is associated with parasiticides and given the potential launch of new prescription combination flea, tick, and heartworm products, potential cannibalization of legacy products for instance? How should we be thinking this will play out over the course of the next year and are you already speaking with manufacturers about your participation in this next generation parasiticide market? Thanks.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. So, I'll answer your first question. 22% comp sales or same-store sales growth is an acceleration from the growth we've seen. We've always expected almost high teens or 20% same-store sales growth. So, 22% is an acceleration of same-store sales for those customers. And hence, our enthusiasm for that continued performance. I think that answers your question on the legacy cohort data.

On preventatives, we don't break out sales by product type. As you can imagine, it's fairly sophisticated given that we have multi-channel capabilities and different delivery mechanisms around how we engaged customers against product categories. What I would remind you is that a very small percentage of patients represents a very large percentage of the total purchases in a practice. And these patients are sick. They tend to have longer chronic care. It could be a liver disease in dogs where they are disproportionally in need a variety of different kinds of medications and in-office services as well as the preventatives, as well as the vaccines. I just think Covetrus is uniquely positioned to coordinate care and deliver a better patient experience for that ultimately far more sensitive patient situation versus just the happy healthy flea, tick, heartworm market. So, we think we'll remain very competitive in preventatives. We think we have really compelling strategies to help veterinarians compete effectively in the preventative category as well as in diets. But I just would remind that the vast majority of spend in the channel is for geriatric care or sicker chronic medication situations for which we think we're uniquely suited for helping to coordinate care for those patients.

Erin Wright -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

Thank you. That concludes today's question and answer sessions. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may disconnect. Have a wonderful day.

Duration: 71 minutes

Call participants:

Nicholas Jansen -- Vice President of Investor Relations

Benjamin Shaw -- President and Chief Executive Officer

Christine Komola -- Executive Vice President and Chief Financial Officer

Erin Wright -- Credit Suisse -- Analyst

John Kreger -- William Blair -- Analyst

David Larsen -- SVB Leerink -- Analyst

Andrew Cooper -- Raymond James -- Analyst

Kevin Kedra -- G. Research -- Analyst

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